APS 1016H Fall 2021

Lecture notes to accompany PPT slides. Please add “speak” to the task bar, if you want to read this
material aloud.

Week 2: September 15th 2021

Introduction:

 Hope you all had a good week. It was a pleasure to have met a lot of you ONLINE. Thank you for
your input on the discussion page. For the rest of you please post your comments under the
discussion board, you get participation marks for your posts.
 Hope you all had a chance to read Chapter 2(Financial Statements, cash flow and taxes) and
Chapter 3(Working with financial statements) from Ross and Chapter 6 (The analysis of financial
statements) from Fraser (see week 2 PPT slides under reference for a reference to this book).
Hope you had a chance to go over the PPT slides from week 2 that I have posted under the
course website posted under “files”.
 Also posted are video lectures for week 2 under “files” in the course website.
 Hope you had a chance to catch up on the business news, there is a lot to digest. I want all of
you to participate in discussion (on the course website). Week 2 discussion topic will be posted
shortly.
 For next week’s readings please read Ch. 5( Time value of money) and Ch. 6 ( Discounted cash
flow valuation) from Ross
 For ancillary readings this week I want to introduce to you the following book: “The dark side of
valuation. Second edition Valuing Young, Distressed and complex business. Author: Aswath
Damodaran. Publishers FT Press. It’s a terrific book, especially if you are into valuations
 I also want to introduce to you the cover page of the recommended text “Ross”.

Overview todays class.

 Let’s go over what we hope to learn from today’s lectures

 By analysing a firms financial statements we can learn about the company’s financial health
based on past financial data. We try to predict the future based on past information and make
some judicial adjustments to determine what the future financial health of the company may
look like.
 The financial statements contain a myriad of information, which at first sight can seem
overwhelming
 Before going over financial statements, always look at the notes to the financial statements that
is look at how the various account values were derived. There is an explanation in the form of
footnotes. There is considerable flexibility in arriving at various accounts
 Listed companies are required to file annual audited financial statements that is they are signed
off by independent accountants who act as auditors to the company. Despite this, problems
arise from time to time
 We will go over Barrick’s 2020 annual report to illustrate some of the typical accounting
methods and analysis
 We will be looking at the balance sheet, Income statement and statement of cash flow
 Carry out some selected financial ratio analysis

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  So who are the users of the financial statements? A. Investors B. Creditors and C. Regulators
 The central point to focus on is to ask: Where is the cash coming from? Where is it going? What
are the implications

So let’s begin

Slide 2:

 We compare this year’s financial data with that of last year, to determine year over year change,
the question to ask is the company’s financial position getting better or worse.
 A balance sheet must balance, which means that total assets must equal total liabilities and
shareholder’s equity. Accounts are listed in order of liquidity. The most liquid (ones that can be
sold for cash quickly) listed first, the least liquid last.
 Data derived from Barrick 2020 annual report

2020 2019
Total assets 46,506 44,392
Total liabilities 14,796 14,565
Shareholder’s equity 31,710 29,827
Property plant & equipment 24,628 24,141
 All above figures are in millions of dollars
 Value of total assets and total liabilities have risen
 Value of PPE has risen
 A fair amount of asset value is tied up in PPE that cannot be easily liquidated
 We need to look at what has caused that

SLIDE 3

 For a manufacturing company a buildup of inventory can become a liability, suggesting finished
products are not being sold
 Let’s look at other accounts

2020 2019
Current assets 8,143 6,887
Current liabilities 2,220 2,376
NWC = ( CA-CL) 5,923 4,511
Accounts receivables 558 363
Accounts payables 1,458 1,155

 All above figures in millions of $

 From a short term perspective the company is in a comfortable position, it can meet its short
term obligations with little difficulty
 Generally companies extend short term credit( accounts receivables) to encourage customers to
buy products from them, essentially providing short term credit

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SLIDE 4

 IFRS (International financial reporting standards). Canada has adopted this standard since 2014,
previously it was known as GAAP
 Machinery is depreciated over a period of time and the value of PPE is reported after
depreciation has been deducted. Depreciation allowance aids companies to invest in more
productive machinery. Generally companies depreciate their machinery at an accelerated pace

SLIDE 5

 Goodwill arises when a company makes an acquisition of another company and pays a premium
for that acquisition. That premium is known as Goodwill. Note Barrick acquisition of Equinox
Minerals, when a premium was paid for that acquisition Such premium is paid to encourage the
target company’s shareholders to tender ( sell) their shares to the acquiring company

SLIDE 6

 Barrick’s long term debt in 2020 was $5,135 million compared to 2019 level of $5,161 million
not much of a difference. Companies tend to maintain a comfortable debt to equity ratio, so
that they are in a comfortable position to service their debt. Interest obligations that come due
must be paid for from company’s cash flows
 Retained earnings account is the measurement of all undistributed earnings. Note retained
earnings are part of shareholders equity, that is what belongs to the shareholders

SLIDE 7

2020 2019
Income before finance items 5,293 million 6,826 million
and taxes
EPS( Earnings per share) 1.31 2.26

 Note reduction before finance items

 Note reduction in EPS
 Preparation of common sized statements allows us to compare company’s financial
performance year over year and also allows us to compare the company’s financial
performance with that of its peers. You will be asked to prepare common sized financial
statements as part of your main project.

SLIDE 8

All in millions of $ 2020 2019

Cost of goods sold 7417 6911
Sales 12,595 9,717
COGS/Sales 0.59 0.71

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  The objective here is to reduce the COGS/sales ratio. Another way of stating the same is
to ask, for every $1 in sales what is the COGS? A value less than 1 implies a company
generates positive gross profit.

SLIDE 9:

 Note discontinued operation means, do not expect any earnings from such an operation
in the future
 Look for EPS growth, if EPS grows so will the company’s share price

SLIDE 10

 Free cash flow = Operating cash flow -Net capital spending - Change in NWC
 Operating cash flow = EBIT + Depreciation –taxes ( note interest has not been deducted)
 Free cash flow in the first few years of forecast will be uneven, thereafter assume it
grows at a constant rate forever, also known as terminal value. To calculate PV of all
these cash flows growing at a constant rate simply use Gordon Growth Model , which is
Po = D1/r-g , where D1 = CF1 and r is the required rate of return and g is the rate of
growth of free cash flow. For example if you want to calculate PV of all future free cash
flows from year 12 to infinity, then P11( that is the present value of these free cash
flows in year 11) = CF12/r-g , where CF12 = cash flow in year 12
 The resultant PV of all free cash flows calculated from year 1 to infinity =NPV
 From the above, Equity value = NPV + cash today ( on the balance sheet) – debt today
( on the balance sheet)- Value of all preferred shares today ( on the balance sheet)
 Equity value/#common shares outstanding= $ value of one share of stock
 The above is very important concept in finance
 Free cash flows can theoretically be distributed in full to all the shareholders
 Natural resource companies in particular need to continually invest in capital
expenditures (machinery and such) in order to maintain and increase its on-going
operations and hence generate operating cash flows from therein.
 Fluctuating cash flows indicate greater uncertainty and thus resulting in greater required
rate of return by the investors, in other words the cost of capital goes up

SLIDE 11

 An analyst needs to look at year over year changes to determine where the cash is
coming from and where it is going
 The question to ask is; is the company using its cash efficiently?
 Operating cash flows are generated from company’s ongoing operations, for example a
mining company generates its operating cash flows from processing its ores( minerals
mined at a profit) and selling the final product, for example gold
 Investing activities, among other things, involve such things as purchasing machinery
 Financing activities involve selling or buying back equities(shares) or selling or buying
back debt( usually in the form of bonds)

SLIDE 12

 We need to focus on cash flows generated from company’s operations

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SLIDE 13

 Remember dividends are paid from company’s free cash flows

 There may be numerous reasons for decline in company’s free cash flows, chief among them
may be a decline in customers demand for the company’s product or services
 In that case, the company needs to re look at its existing strategy

SLIDE 14

 Produced 4.8 million ounces of gold in 2020

 Net earnings of 2.3 billion dollars
 $3.36 billion in annual free cash flow
 Annual operating cash flow of $5.4 billion
 EPS of $1.15
 Proven reserves of 21 million ounces of gold
 Truly amazing numbers

SLIDE 15

• Revenue from gold production: $11.67 billion

• Total revenue: $12.6 billion

• Cost of sales: $7.4 billion

• Net earnings : $ 2 billion

• Project Capex: $471 million

• Gold production : 4.76 million ounces

• Total all in sustaining cost per ounce of gold produced:$967

• Debt current and long term: $5.16 billion

• Cash : $5.19 billion

SLIDE 16

2020 annual report

• Net cash provided by operating activities: $5.4billion. 2019: $2.83 billion

• Net cash used in investing activities: (1,286 mill) for 2019: $50 million

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 • Net cash used by financing activities: ($2254million) for 2019: $(1,139) million

• Cash and cash equivalent at end of period: $5,188million for 2019: $3,314 million

SLIDE 17

 Revenue: $ 12,595 mill. For 2019:$9,717 million. Substantial increase here

 Cost of sales: $7,417 mill. for 2019:$6,911 million

 Net income: $3,614 million. For 2019: $ 4,574 million. A drop in net income

 Exploration expense: $ 295 mill. For 2019: $ 342 million

SLIDE 18

 2020

 Total assets: $46.5 billion. For 2019 $44.4 billion

 Debt: $ 5,135 mill. For 2019: $5,161 million

SLIDE 19

 Beta: .103 ( April 29th 2021)

 Stock price $ 26.125( April 29th 2021)

 See TMX link to get access into stock market quotations( daily trading of various stocks)
 Beta coefficient is a measure of how risky a company is. By definition, beta coefficient of the
market (an average value of a collection of stocks on the Toronto stock exchange) is 1. Any stock
with a beta coefficient value of greater than 1 is more risky compared to the market, whereas a
company with a beta coefficient of less than 1 is less risky compared to the market.
 Price increase in value of Barrick stock is a reflection of recent uptick in the price of gold.

SLIDE 20

 Shares o/s:1,778,371,343 ( or 1.778 billion)

 P/E: 15.9

 Operating CF/share: $3.05

 EPS: 1.69

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  Analysts use financial ratios to compare performance of a company in comparison to itself and
to that of its competitors within the same industry sector.
 You will get a chance to do significant amount of financial ratio analysis in your main project
report which will be submitted at the end of the term
 For now let’s focus on measures such as operating cash flow and Earnings per share (EPS). You
want to look for an upward trend in both these measures

SLIDES 21-24

 Some of industry averages of the financial ratios. The industry averages are a base with which to
compare financial ratios that you have calculated for a particular company. You can get access
to all major industry averages of financial ratios from Bloomberg terminal at the Rotman Library,
University of Toronto

SLIDE 25

 Lists several references relevant to this course